Published 4:00 am, Friday, June 25, 2004

Photo: RICH PEDRONCELLI

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Making a surprise visit, Gov. Arnold Schwarzenegger went table to table asking lunch-time patrons to call their state legislators and tell them to vote for his budget,at a Folsom, Calif. restaurant, Thursday, June 24, 2004. Schwarzenegger told, Pam Chackel, left, Michele Cooksy, Janine Wilson, back second from right, and Grace Milan, right, that he hoped to sign the 2004-05 state budget by the July 1 deadline but couldn't do it unless the legislature passed his spending plan. (AP Photo/Rich Pedroncelli) less

Making a surprise visit, Gov. Arnold Schwarzenegger went table to table asking lunch-time patrons to call their state legislators and tell them to vote for his budget,at a Folsom, Calif. restaurant, Thursday, ... more

Restoration of cuts the governor has proposed to higher education and health and human service programs now hinges on whether two other issues with potentially large savings can be resolved.

After talking to lunchtime patrons at a Romano's Macaroni Grill in Folsom (Sacramento County), Schwarzenegger said the sticking points on his $77.6 billion plan were how to structure local government financing and sell pension obligation bonds.

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"There's a little bit more than $2 billion when we solve those two issues, " the Republican governor said. "Then there will be a little bit of money left ... for various different things that (Democrats) need. So, this is all doable. The key thing is that we get their help and work together as soon as possible to ... solve those two issues."

Assembly and Senate leaders said they are not sure if the governor has completely agreed to restoring the higher education and social service cuts, but said progress was being made on all areas of disagreement.

"We feel really good about where we are," said Assembly Speaker Fabian Nunez, D-Los Angeles. "Over the last four or five days, we have seen a vast improvement in the cooperation between the legislative and executive branch to get this budget deal and do it in a timely fashion."

A proposed $929 million bond borrowed against state employee pensions emerged Thursday as a key sticking point.

Last year, lawmakers used a $2 billion bond as part of the budget solution, but it was ruled illegal by the courts. To avoid a similar fate this year, the administration tied the bond to a 1 percent increase in employee contributions to the pension fund.

Democrats object to that approach, saying that changes in pension contributions must be handled through collective bargaining.

"They are not talking about pension reform, they are talking about a tax of 1 percent on the earnings of all state workers," said Senate President Pro Tem John Burton, D-San Francisco. "They don't want to tax millionaires or billionaires, but they are willing to tax secretaries and other people who are making $33,000 a year."

Lawmakers indicated that they were closer to a deal on local government financing, which would pave the way for the state to save $1.3 billion.

Schwarzenegger had agreed that the state would cut that amount from cities and counties' budgets in exchange for a proposed ballot measure that constitutionally protects their main sources of revenue -- property and sales taxes -- starting in 2006.

But legislative critics of the current system said they would not vote for a plan to lock in the current balance between property and sales tax. They believe cities and counties depend too much on sales tax and therefore choose to encourage the building of auto malls and large retail centers rather than housing.

Some Democrats had also objected to locking into place the cut in the vehicle license fee implemented by Schwarzenegger when he took office. That money also goes to local governments.

Lawmakers expect a final compromise to guarantee cities and counties their funding but allow reforms over the type of money they get to happen in the future.

While negotiations continued at the Capitol, Schwarzenegger spent an hour going from table to table at a crowded restaurant 30 miles away.

He asked patrons to call their lawmakers and urge them to pass a budget on time, singling out Democrats for holding up the process.

"Make sure they are not dragging their feet," he told Andrew Volpendesta. "I want to make the cuts ... and they of course want to continue spending the way they always have, so now we are negotiating to meet somewhere in the middle."

While the governor told several people they should call lawmakers and say their vote in November would be based on whether a budget was on time, Burton said he was not concerned.

"The importance of the budget is what's in it, not the date," he said. "It's what in it."